NOTE C – LOANS

The following tables set forth by class of loans as of December 31, 2018 and 2017 the amount of loans individually and collectively evaluated for impairment and the portion of the allowance for loan losses allocable to such loans.



	December 31, 2018
	Loans						Allowance for Loan Losses
(in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Ending Balance
Commercial and industrial	$	22	$	98,763	$	98,785	$	—	$	1,158	$	1,158
Commercial mortgages:
Multifamily		—		756,714		756,714		—		5,851		5,851
Other		—		433,330		433,330		—		3,783		3,783
Owner-occupied		520		90,731		91,251		—		743		743
Residential mortgages:
Closed end		1,814		1,807,837		1,809,651		16		18,828		18,844
Revolving home equity		743		66,967		67,710		—		410		410
Consumer and other		324		5,634		5,958		—		49		49
	$	3,423	$	3,259,976	$	3,263,399	$	16	$	30,822	$	30,838



	December 31, 2017
Commercial and industrial	$	48	$	109,575	$	109,623	$	—	$	1,441	$	1,441
Commercial mortgages:
Multifamily		—		682,593		682,593		—		6,423		6,423
Other		—		414,783		414,783		—		4,734		4,734
Owner-occupied		531		95,100		95,631		—		1,076		1,076
Residential mortgages:
Closed end		1,368		1,557,196		1,558,564		18		19,329		19,347
Revolving home equity		—		83,625		83,625		—		689		689
Consumer and other		—		5,533		5,533		—		74		74
	$	1,947	$	2,948,405	$	2,950,352	$	18	$	33,766	$	33,784

The following tables present the activity in the allowance for loan losses for the years ended December 31, 2018, 2017 and 2016.



(in thousands)	Balance at 1/1/18		Chargeoffs		Recoveries		Provision for Loan Losses (Credit)		Balance at 12/31/18
Commercial and industrial	$	1,441	$	683	$	34	$	366	$	1,158
Commercial mortgages:
Multifamily		6,423		—		—		(572)		5,851
Other		4,734		—		—		(951)		3,783
Owner-occupied		1,076		—		—		(333)		743
Residential mortgages:
Closed end		19,347		552		118		(69)		18,844
Revolving home equity		689		253		150		(176)		410
Consumer and other		74		9		4		(20)		49
	$	33,784	$	1,497	$	306	$	(1,755)	$	30,838



(in thousands)	Balance at 1/1/17		Chargeoffs		Recoveries		Provision for Loan Losses (Credit)		Balance at 12/31/17
Commercial and industrial	$	1,408	$	102	$	13	$	122	$	1,441
Commercial mortgages:
Multifamily		6,119		—		—		304		6,423
Other		4,296		—		—		438		4,734
Owner-occupied		959		820		—		937		1,076
Residential mortgages:
Closed end		15,740		97		3		3,701		19,347
Revolving home equity		1,401		100		—		(612)		689
Consumer and other		134		27		3		(36)		74
	$	30,057	$	1,146	$	19	$	4,854	$	33,784



(in thousands)	Balance at 1/1/16		Chargeoffs		Recoveries		Provision for Loan Losses (Credit)		Balance at 12/31/16
Commercial and industrial	$	928	$	445	$	4	$	921	$	1,408
Commercial mortgages:
Multifamily		6,858		—		—		(739)		6,119
Other		3,674		—		—		622		4,296
Owner-occupied		1,047		—		—		(88)		959
Residential mortgages:
Closed end		13,639		259		9		2,351		15,740
Revolving home equity		1,016		—		12		373		1,401
Consumer and other		94		5		5		40		134
	$	27,256	$	709	$	30	$	3,480	$	30,057

For individually impaired loans, the following tables set forth by class of loans at December 31, 2018, 2017 and 2016 the recorded investment, unpaid principal balance and related allowance. The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the years ended December 31, 2018, 2017 and 2016. The recorded investment is the unpaid principal balance of the loans less any interest payments applied to principal and any direct chargeoffs plus or minus net deferred loan costs and fees. Any principal and interest payments received on nonaccrual impaired loans are applied to the recorded investment in the loans. The Bank recognizes interest income on other impaired loans using the accrual method of accounting.



	2018
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	22	$	22	$	—	$	48	$	3
Commercial mortgages - owner-occupied		520		604		—		530		25
Residential mortgages:
Closed end		1,561		1,573		—		1,566		5
Revolving home equity		743		747		—		754		—
Consumer and other		324		324		—		339		17
With an allowance recorded:
Residential mortgages - closed end		253		253		16		266		12
Total:
Commercial and industrial		22		22		—		48		3
Commercial mortgages - owner-occupied		520		604		—		530		25
Residential mortgages:
Closed end		1,814		1,826		16		1,832		17
Revolving home equity		743		747		—		754		—
Consumer and other		324		324		—		339		17
	$	3,423	$	3,523	$	16	$	3,503	$	62



	2017
With no related allowance recorded:
Commercial and industrial	$	48	$	48	$	—	$	67	$	5
Commercial mortgages - owner-occupied		531		615		—		654		21
Residential mortgages - closed end		1,095		1,102		—		1,122		7
With an allowance recorded:
Residential mortgages - closed end		273		272		18		280		13
Total:
Commercial and industrial		48		48		—		67		5
Commercial mortgages - owner-occupied		531		615		—		654		21
Residential mortgages - closed end		1,368		1,374		18		1,402		20
	$	1,947	$	2,037	$	18	$	2,123	$	46



	2016
With no related allowance recorded:
Commercial and industrial	$	131	$	131	$	—	$	134	$	1
Commercial mortgages - owner-occupied		558		636		—		575		—
Residential mortgages:
Closed end		230		313		—		245		—
Revolving home equity		280		279		—		280		—
With an allowance recorded:
Residential mortgages:
Closed end		626		634		45		641		29
Revolving home equity		1,490		1,491		482		1,493		—
Total:
Commercial and industrial		131		131		—		134		1
Commercial mortgages - owner-occupied		558		636		—		575		—
Residential mortgages:
Closed end		856		947		45		886		29
Revolving home equity		1,770		1,770		482		1,773		—
	$	3,315	$	3,484	$	527	$	3,368	$	30

Aging of Loans. The following tables present the aging of the recorded investment in loans by class of loans.



	December 31, 2018
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More and Still Accruing		Nonaccrual Loans		Total Past Due Loans & Nonaccrual Loans		Current		Total Loans
Commercial and industrial	$	—	$	43	$	—	$	—	$	43	$	98,742	$	98,785
Commercial mortgages:
Multifamily		—		—		—		—		—		756,714		756,714
Other		—		—		—		—		—		433,330		433,330
Owner-occupied		—		—		—		—		—		91,251		91,251
Residential mortgages:
Closed end		864		—		—		1,392		2,256		1,807,395		1,809,651
Revolving home equity		—		—		—		743		743		66,967		67,710
Consumer and other		2		—		—		—		2		5,956		5,958
	$	866	$	43	$	—	$	2,135	$	3,044	$	3,260,355	$	3,263,399



	December 31, 2017
Commercial and industrial	$	20	$	—	$	—	$	—	$	20	$	109,603	$	109,623
Commercial mortgages:
Multifamily		—		—		—		—		—		682,593		682,593
Other		—		—		—		—		—		414,783		414,783
Owner-occupied		—		—		—		—		—		95,631		95,631
Residential mortgages:
Closed end		2,186		21		—		1,000		3,207		1,555,357		1,558,564
Revolving home equity		522		—		—		—		522		83,103		83,625
Consumer and other		7		—		—		—		7		5,526		5,533
	$	2,735	$	21	$	—	$	1,000	$	3,756	$	2,946,596	$	2,950,352

There were no loans in the process of foreclosure nor did the Bank hold any foreclosed residential real estate property at December 31, 2018 or 2017. In 2017, the Bank took a deed-in-lieu of foreclosure for one commercial real estate property. The property was recorded as other real estate owned at December 31, 2017 and had a carrying value of $5,125,000, which was net of a valuation allowance of $725,000. Other real estate owned at December 31, 2017 consisted solely of the property taken and was included in the consolidated balance sheet under “other assets.” The Bank sold the property for its carrying value in the first quarter of 2018.

Troubled Debt Restructurings. A restructuring constitutes a troubled debt restructuring when it includes a concession by the Bank and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Bank performs the evaluation under its internal underwriting policy.

The following table presents information about loans modified in troubled debt restructurings during the years ended December 31, 2018 and 2016. The Bank did not modify any loans in troubled debt restructurings during 2017.



	Outstanding Recorded Investment					Interest Rates
(dollars in thousands)	Number of Loans	Pre- Modification		Post- Modification		Pre- Modification	Post- Modification
2018:
Residential mortgages - closed end	1	$	432	$	472	5.86%	4.50%
Consumer and other	1		350		350	6.50%	6.50%
	2	$	782	$	822
2016:
Commercial and industrial	2	$	1,131	$	1,131	5.00% and 6.75%	5.00% and 6.75%
Residential mortgages - closed end	1		109		109	3.95%	3.95%
	3	$	1,240	$	1,240

In 2018, the Bank consolidated an unsecured business line of credit, residential mortgage and home equity line of credit to a single borrower into a new first lien residential mortgage. The restructured residential mortgage resulted in a below market interest rate and extended term. Also in 2018, the Bank modified two consumer loans to a single borrower into one loan. The term of the restructured loan was extended for 12 months and the post-modification interest rate was lower than the current market rate for new debt with similar risk.

The 2016 troubled debt restructurings include the modification of a $1.0 million commercial and industrial loan into a new time loan which was subsequently repaid during 2016. The post-modification interest rates for all of the 2016 restructurings in the table above were lower than the current market rates for new debt with similar risk.

At December 31, 2018, 2017 and 2016, the Bank had an allowance for loan losses of $16,000, $18,000 and $45,000, respectively, allocated to specific troubled debt restructurings. The Bank had no commitments to lend additional amounts to loans that were classified as troubled debt restructurings.

There were no troubled debt restructurings for which there was a payment default during 2018, 2017 and 2016 that were modified during the twelve-month period prior to default. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Risk Characteristics. Credit risk within the Bank’s loan portfolio primarily stems from factors such as changes in the borrower’s financial condition, credit concentrations, changes in collateral values, economic conditions and environmental contamination of properties securing mortgage loans. The Bank’s commercial loans, including those secured by real estate mortgages, are primarily made to small and medium-sized businesses. Such loans sometimes involve a higher degree of risk than those to larger companies because such businesses may have shorter operating histories, higher debt-to-equity ratios and may lack sophistication in internal record keeping and financial and operational controls. In addition, most of the Bank’s loans are made to businesses and consumers on Long Island and in the boroughs of New York City, and a large percentage of these loans are mortgage loans secured by properties located in those areas. The primary sources of repayment for residential and commercial mortgage loans include employment and other income of the borrowers, the businesses of the borrowers and cash flows from the underlying properties. In the case of multifamily mortgage loans, a substantial portion of the underlying properties are rent stabilized or rent controlled. These sources of repayment are dependent on, among other things, the strength of the local economy.

Credit Quality Indicators. The Corporation categorizes loans into risk categories based on relevant information about the borrower’s ability to service their debt including, but not limited to, current financial information of the borrower and any guarantors, payment experience, credit underwriting, documentation, public records, due diligence checks and current economic trends.

Commercial and industrial loans and commercial mortgage loans are risk rated utilizing a ten point rating system. The ten point risk rating system is described hereinafter.


Internally Assigned Risk Rating
1 – 2	Cash flow is of high quality and stable. Borrower has very good liquidity and ready access to traditional sources of credit. This category also includes loans to borrowers secured by cash and/or marketable securities within approved margin requirements.
3 – 4	Cash flow quality is strong, but shows some variability. Borrower has good liquidity and asset quality. Borrower has access to traditional sources of credit with minimal restrictions.
5 – 6	Cash flow quality is acceptable but shows some variability. Liquidity varies with operating cycle and assets provide an adequate margin of protection. Borrower has access to traditional sources of credit, but generally on a secured basis.
7	Watch - Cash flow has a high degree of variability and subject to economic downturns. Liquidity is strained and the ability of the borrower to access traditional sources of credit is diminished.
8	Special Mention - The borrower has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank to risk sufficient to warrant adverse classification.
9	Substandard - Loans are inadequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
10	Doubtful - Loans have all the inherent weaknesses of those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Risk ratings on commercial and industrial loans and commercial mortgages are initially assigned during the underwriting process and affirmed as part of the approval process. The ratings are periodically reviewed and evaluated based upon borrower contact, credit department review or independent loan review.

The Bank's loan risk rating and review policy establishes requirements for the annual review of commercial real estate and commercial and industrial loans. The requirements include details of the scope of coverage and selection process based on loan-type and risk rating. Among other things, at least 80% of the recorded investment of commercial real estate loans as of December 31 of the prior year must be reviewed annually. Lines of credit are also reviewed annually at each proposed reaffirmation. The frequency of the review of other loans is determined by the Bank’s ongoing assessments of the borrower’s condition.

Residential mortgage loans, revolving home equity lines and other consumer loans are risk rated utilizing a three point rating system. In most cases, the borrower’s credit score dictates the risk rating. However, regardless of credit score, loans that are on management’s watch list or have been criticized or classified by management are assigned a risk rating of 3. A credit score is a tool used in the Bank’s loan approval process, and a minimum score of 680 is generally required for new loans. Credit scores for each borrower are updated at least annually. The risk ratings along with their definitions are as follows:


Internally Assigned Risk Rating
1	Credit score is equal to or greater than 680.
2	Credit score is 635 to 679.
3	Credit score is below 635 or, regardless of credit score, the loan has been classified, criticized or placed on watch.

The following tables present the recorded investment in commercial and industrial loans and commercial real estate loans by class of loans and risk rating. Loans shown as Pass are all loans other than those risk rated Watch, Special Mention, Substandard or Doubtful.



	December 31, 2018
	Internally Assigned Risk Rating
					Special
(in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial and industrial	$	97,684	$	—	$	667	$	434	$	—	$	98,785
Commercial mortgages:
Multifamily		756,714		—		—		—		—		756,714
Other		417,838		14,194		1,298		—		—		433,330
Owner-occupied		85,710		1,090		3,911		540		—		91,251
	$	1,357,946	$	15,284	$	5,876	$	974	$	—	$	1,380,080



	December 31, 2017
Commercial and industrial	$	108,846	$	450	$	279	$	48	$	—	$	109,623
Commercial mortgages:
Multifamily		673,128		2,354		7,111		—		—		682,593
Other		404,379		7,567		2,837		—		—		414,783
Owner-occupied		93,618		—		1,482		531		—		95,631
	$	1,279,971	$	10,371	$	11,709	$	579	$	—	$	1,302,630

The following tables present the recorded investment in residential mortgage loans, home equity lines and other consumer loans by class of loans and risk rating. Loans shown as Pass are all loans other than those risk rated Watch, Special Mention, Substandard or Doubtful.



	December 31, 2018
	Internally Assigned Risk Rating
					Special
(in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Residential mortgages:
Closed end	$	1,807,525	$	312	$	—	$	1,814	$	—	$	1,809,651
Revolving home equity		66,718		—		249		743		—		67,710
Consumer and other		4,958		—		—		324		—		5,282
	$	1,879,201	$	312	$	249	$	2,881	$	—	$	1,882,643



	December 31, 2017
	Internally Assigned Risk Rating
(in thousands)	Pass		Watch		Special Mention		Substandard		Doubtful		Total
Residential mortgages:
Closed end	$	1,554,168	$	2,200	$	828	$	1,368	$	—	$	1,558,564
Revolving home equity		82,665		256		704		—		—		83,625
Consumer and other		5,236		—		—		—		—		5,236
	$	1,642,069	$	2,456	$	1,532	$	1,368	$	—	$	1,647,425

Deposit account overdrafts were $676,000 and $297,000 at December 31, 2018 and 2017, respectively. They are not assigned a risk rating and are therefore excluded from consumer loans in the tables above.

Loans to Directors and Executive Officers. At December 31, 2018, there were no outstanding loans to directors, including their immediate families and companies in which they are principal owners, or executive officers. The aggregate outstanding amount of these loans was $36,000 at December 31, 2017, all of which was repaid in 2018. There were no loans to directors or executive officers that were nonaccrual at December 31, 2018 or 2017.